2015 Q4 Market Commentary

Posted on: 01/13/2016

In the year just past, we experienced many things—a prelude to a Presidential election, a renewal of terrorist concerns, a trip to Pluto—but in the investment markets, we will look back and yawn. Despite some entertaining ups and downs, particularly in the third quarter of the year, the markets ended pretty much where they began, eking out small gains and losses pretty much across the board. The final three months of the year provided investors with gains that were tantalizingly close to wiping out the losses of the previous three.

Meanwhile, bond investors started the year, as in years past, expecting that 2015 would finally see interest rates rise across the board. Many professionals have been holding very low-yielding short-term instruments or cash in their bond portfolio allocations as a defensive measure, and had to endure almost zero returns without the satisfaction of having ducked the long-anticipated nasty downturn in bond values.

What’s going to happen in 2016? Of course, nobody knows with any degree of certainty. But many professional investors are approaching the New Year with an unusual degree of caution. By most metrics, U.S. stocks are pricier than their historical averages. That doesn’t mean they can’t get more so, but it seems unlikely that people will pay a lot more for a dollar of earnings in the coming year than they will today. Meanwhile, economic growth is moderate at best, which suggests that, in aggregate, U.S.-based companies will only be able to grow their value at moderate rates as well.

Don’t look for a return to high oil prices in the near future, as oil production from post-sanctions Iran will soon hit the market, adding to what economists are already describing as an oil and gas glut.

And, yes, there are some warning signs on the horizon. Nobody seems to know exactly what to make of the high-yield bond market. Is the recent downturn a sign of some long-term problems or a blip on the screen? One could make the argument that emerging market governments and companies with low credit ratings have gotten away with giving their lenders extremely low (by historical standards) interest rates. If rates rise, investors may want to sell those bonds, and there could be a sudden rush for the exits, potentially causing liquidity problems for the funds that are holding them. But one would expect those funds to be preparing for this possibility, and similar dour forecasts have, in the past, had a habit of not showing up in the real world.

Finally, we’ve finally seen the Federal Reserve Board’s first tentative effort to let the short-term fixed income markets find their natural level, which has already led to higher mortgage rates. Nobody knows if or when the Fed will raise rates again in the new year, or what the impact would be, but the fact that it’s an election year, and the economy is still not exactly robust, suggests that the central bank’s policymakers will proceed very cautiously.

Will that happen in the next 12 months? All we can say is that the markets often punish those who try to outsmart them. If the market goes down in the coming year, it will mean that we all will be able to buy stocks at cheaper prices in anticipation of the next rise—whenever and however it arrives.